- Flying by the seat of your pants. If you’re a perfectionist don’t trade. Everyone has losing trades but if you believe you can turn losers into winners it’s only a matter of time before you’re broke. Look at long-term capital and it’s two Nobel Prize winners. The difference between a good traders and a bad one is a good trader recognizes when he’s wrong and admits it by getting out. Resulting in smaller losses for his clients.
- Averaging down on individual stocks have killed more traders than any other mistake, don’t do it. It’s OK to average down if you’re indexing due to automatic rebalancing balancing.
- Don’t trade everyday. This is the biggest problem for professional traders. There are times when cash is king mean and green.
- Trading in stocks with no liquidity. No volume has execution risk in fast markets, big volatility, zero research, and little if any institutional holders.
- Use a benchmark like the S&P to rate your performance. Many individual investors are happy if they just don’t lose money. The problem here is you may be taking too much risk for the return you’re getting. A benchmark is a way to keep your money manger honest, think of it as a report card.
- Ignoring systemic market risk. Does “ all boats rise is a high tide” sound familiar? Individual investors fail to see the risk and don’t sell in broad market down turns. Your stock may be a great stock but is falling due to its affiliation to a particular index. Systemic risk is real and is not ignored by professionals.
- Don’t confuse risk (uncertainty) with danger. Understanding risk doesn’t shield you against potential losses. If you understand the risk but make a foolish move you will pay the price.
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